Background

Spruce, a public limited company, has a reporting date of 31 December 20X2. It prepares financial statements in accordance with IFRS Standards. Spruce has approached its bank to request an increased overdraft facility. The bank wish to review the financial statements for the year ended 31 December 20X2 before making a decision. They will be paying particular attention to Spruces profit for the period and its level of reported liabilities. A new financial controller has recently started working at Spruce. She is aware that the transactions below have not been accounted for in accordance with International Financial Reporting Standards. She is a member of ACCA but is not sure of her ethical responsibilities.

Share appreciation rights

On 1 January 20X2, Spruce granted 20,000 share appreciation rights (SARs) to each of its 52 senior managers and directors. The SARs entitle these employees to a cash bonus based on Spruces shareprice on 31 December 20X4 as long as they are still employed on this date. By 31 December 20X2, two senior managers had left Spruce. It is estimated that another five will leave prior to the vesting date. The fair value per right was $3 on 1 January 20X2 and $5 on 31 December 20X2. No accounting entries have been posted in respect of the SARs. (4 marks)

Required:

(a) Discuss how the above three issues should be dealt with in the financial statements for the year ended 31 December 20X2. Note: the mark allocation is shown against each of the three issues above.

(b) Discuss the ethical issues raised by the above issues and the actions that the financial controller should take. Professional marks will be awarded question 1(b) for the quality of the discussion. (2 marks)